Who would have thought that an article on this subject would be written in the midst of a mid cap mania? Personalfn, for one, has been a votary of large cap funds and this is amply reflected in our advice to clients.
Now we have had a couple of 'new fund offers' (NFO) of the large cap variety in the middle of thematic and mid cap NFOs. So is it a case of enter large caps, exit mid caps? Not quite!
As early as in June 2005, when the BSE Sensex breached the 7,000 level for the first time, we came out with a 5-point strategy for investors. The very second point in that strategy note was to invest in large cap funds.
We had reckoned then that investors would be heavily invested in mid cap funds and the need of the hour was to diversify risk and invest in large cap funds. You might say, that piece of advice is turning out to be prophetic.
Lets first understand how large caps and mid caps work so as to appreciate the benefits they bring to the portfolio. Large cap stocks are certainly more stable and predictable compared to mid caps.
Such companies have a reputation for consistency and stability built on a long-standing track record that is there for everyone to see. Large caps are well-researched as information on them is widely available, so there are relatively fewer surprises for investors.
Mid caps on the other hand do not have that long a track record. They are bought by investors for what they will offer going forward, i.e. potential performance as opposed to actual performance. Since there isn't much of a track record to speak of, information on these companies isn't as readily available and they tend to be under-researched.
If companies are not researched well, it should not surprise anyone if there are unpleasant surprises in store for investors.
In an exclusive interview with Personalfn, K N Siva Subramanian, Senior VP, Franklin Templeton Mutual Fund, spoke at length about mid cap stocks and their potential. And he had a cautious forecast for mid caps: "We don't expect mid cap funds to exhibit the same level of out performance over the medium to long term."
As the loyalty of the market and the fund houses alternates between large caps, mid caps and multi caps, we believe your loyalty must rest with your asset allocation and risk profile and not with any market segment.
Since mid caps and higher risk go together, these funds/stocks are ideally suited for the aggressive investor. If you are an equities person, but prefer some degree of predictability in the way your portfolio performs over 3-5 years, then large cap funds/stocks should dominate your portfolio.
So there is a place for well-managed large cap and mid cap funds in your portfolio. At Personalfn, we identified the risks and opportunities associated with mid caps earlier on. At the same time, we also saw the risks earlier on of the many mid cap NFOs and the disproportionate investor monies flowing into them.
In our view, the way to go about investing is to begin by doing a careful assessment of risk appetite and investment objective and then populate your portfolio with the investments that can best help you get there. It's when investors do it the other way around, that it becomes a matter of concern.
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